Financial Crime and Corruption by Samuel Vaknin, Ph.D., and edited by Lidija Rangelovska

Financial Crime and Corruption (2nd Edition) by Samuel Vaknin, Ph.D., and edited by Lidija Rangelovska, originally released in 2007. The work is a collection of articles and essays that dissect the pervasive nature of financial misconduct globally, focusing heavily on political corruption, corporate fraud, and illicit markets, especially within post-communist and developing economies. The book provides a detailed typology of criminal financial mechanisms, analyzing systemic issues like kleptocracy, money laundering, and the psychological pathologies of corporate leadership that enable massive fraud.

Table of Contents

Who May Benefit from the Book

Criminologists/Analysts: Studying typologies and global crime networks.
Investors/Executives: Seeking insight into corporate governance failures and fraud psychology.
Transition Economy Students: Analyzing privatization and institutional collapse.
Lawyers/Bankers: Dealing with compliance and anti-money laundering regulations.
Policy Makers: Developing anti-corruption and institutional reform strategies.

Top 3 Key Insights

Financial crime is ubiquitous, spanning political patronage and corporate misconduct globally.
Corruption in transition economies is systemic, rooted in kleptocracy and institutional collapse, fostering a powerful criminal class.
Audacious corporate fraud is driven by narcissistic executives who operate believing they are immune to mortal consequences.

4 More Lessons and Takeaways

Anti-money laundering efforts standardize global law, accelerating the decline of tax havens by demanding transparency and uniform legal platforms.
The ancient, trust-based Hawala system thrives as an efficient, low-cost alternative where domestic official banking systems are corrupt or dysfunctional.
Post-communist criminals functioned as true entrepreneurs, possessing capital and market awareness to fill the economic vacuum left by state collapse.
Success requires zealously prosecuting both corporate bribe-givers and political recipients, coupled with liberalization and deep institutional overhaul.

The Book in 1 Sentence

A provocative analysis exposing how corruption, kleptocracy, and narcissistic leaders shape global finance and exploit vulnerable economies.

The Book Summary in 1 Minute

Financial Crime and Corruption provides a forensic examination of global financial misconduct. The book argues that crime is often institutional, detailing how slush funds facilitate bribery across governments and corporations. In Eastern Europe, systemic corruption resulted in kleptocracies that looted state assets, with criminals filling the void as entrepreneurs. Sophisticated money laundering disguises trillions in illicit funds, but global regulations are eroding offshore havens. The analysis covers diverse illicit markets, including maritime piracy run by organized crime and organ trafficking driven by poverty. The text also links corporate malfeasance directly to the psychology of executives, arguing that malignant narcissism fosters brazen, high-stakes fraud. Ultimately, the book calls for radical transparency, institutional strengthening, and aggressive prosecution of both bribe-givers and recipients to restrain pervasive financial criminality.

Chapter-Wise Book Summary

I. Slush Funds

Slush funds are unofficial accounts concealed outside state or corporate budgets, used primarily for corrupt activities such as laundering money, dispensing patronage, and bribing decision makers. Examples include funds skimmed from oil proceeds in Kazakhstan and accounts used by Japanese officials. Corporations use methods like padded invoices and sham contracts to generate these secret funds.

Hidden, off-balance sheet corporate or state funds.
Used for bribery, laundering, and political patronage.
Generated via deceptive accounting like padded invoices.
Important Quote: “Slush funds are obtained from a joint stock company’s finances, carefully managed so that the amounts involved do not appear on the balance sheet.”.

II. Corruption and Transparency

Corruption is culturally subjective but globally pervasive, often initiated by multinationals seeking favorable outcomes. It is classified based on outcomes: Income Supplement (minor) or Decision Altering Fees (State Capture), which distort resource allocation. Effective remedies require radical transparency, deregulation, and the prosecution of both the bribe-giver and the recipient. The moral authority of international aid officials is compromised by their extravagant lifestyles.

Ranges from minor fees to politically destructive State Capture.
Transparency and press scrutiny are the most potent remedies.
Anti-corruption strategies must target both those who bribe and those who accept.
Important Quote: “The most potent remedy against corruption is sunshine – free, accessible, and available information disseminated and probed by an active opposition, uncompromised press, and assertive civic organizations and NGO’s.”.

III. Money Laundering in A Changed World

Money laundering is the process of disguising the illegal origin of funds, which accounts for 2–5% of world GDP, largely stemming from tax evasion and fraud. The layering process utilizes complex financial instruments and offshore centers. International efforts (FATF, UN) are homogenizing legal platforms, diminishing the utility of tax havens, but launderers are turning to derivatives and online services where jurisdiction is complicated.

Annual estimated scale is $800 billion to $2 trillion.
Global regulatory efforts are accelerating the decline of offshore centers.
Launderers now exploit online banking and derivatives.
Important Quote: “Money laundering, its venues and techniques, are an integral part of the economic fabric of the world.”.

IV. Hawala, or The Bank that Never Was

Hawala is an ancient, trust-based, paperless banking system relying on Hawaladars to transfer money globally with minimal fees. It is highly favored for its efficiency and reliability, offering a necessary alternative to corrupt or morbid official banking institutions in developing countries. While used for legitimate remittances, Hawala networks are exploited by tax evaders, organized crime, and terrorists.

Trust-based, cheap, and highly efficient paperless system.
Used extensively for remittances and tax evasion.
Digital trails and massive transaction scale assist international tracing efforts.
Important Quote: “Hawala provides a cheap… efficient, and frictionless alternative to morbid and corrupt domestic financial institutions.”.

V. Straf – Corruption in Central and Eastern Europe

Corruption in Central and Eastern Europe (CEE) is pervasive, fueled by stifling bureaucracy in countries that are “legalistic” but not “lawful”. Corrupt practices are sometimes utilitarian (Acceleration Fees) but are often destructive (Decision Altering Fees). IMF and World Bank officials lack moral authority due to their luxurious lifestyles. Eradication requires high-profile prosecutions, deregulation, and foreign-supervised institutional strengthening.

Corruption is pervasive (“ambient corruption”) and bureaucratic.
IMF/World Bank lifestyles undermine anti-corruption lectures.
Solutions mandate deregulation and strengthening courts and police.
Important Quote: “In many of the former republics of Yugoslavia, it is impossible to obtain statistics… without resorting to kickbacks.”.

VI. The Kleptocracies of the East

The post-communist transition was dominated by political kleptocracies and organized crime that executed a massive transfer of state assets to cronies during privatization. Criminal organizations thrived in the economic vacuum, acting as savvy entrepreneurs with liquidity, international networks, and managerial skills that replaced dysfunctional state organs. The criminal class is often admired and integrated into the new elites.

Privatization transferred state assets to political insiders.
Criminals operated as entrepreneurs filling the economic void.
The criminal code sometimes replaced lethargic official judiciary.
Important Quote: “In the void-like interregnum between centrally planned and free market economies only criminals, politicians, managers, and employees of the security services were positioned to benefit from the upheaval.”.

VII. FIMACO – Russia’s Missing Billions

This chapter addresses the alleged diversion of IMF funds in Russia, possibly through FIMACO, a subsidiary of the Central Bank. FIMACO was utilized as a slush fund to hide state assets from creditors and generated unreported profits. The IMF defended its actions despite audit reports hinting at fund siphoning, leading to widespread distrust regarding accountability.

IMF funds allegedly diverted via Central Bank subsidiary FIMACO.
FIMACO operated as a massive slush fund hiding assets from creditors.
Controversy over IMF cover-up and PwC’s non-disclosure of audit findings.
Important Quote: “Nor is Dubinin more credible when he denies that profits and commissions were accrued in FIMACO and then drained off.”.

VIII. The Enrons of the East

Corporate scandals in CEE, such as Russia’s Gazprom, exhibited fraudulent accounting practices similar to Enron. Western auditing firms (like the Big Four) were implicated, often prioritizing lucrative contracts over ethical compliance and losing moral authority. This lack of credibility retarded the adoption of Western standards (GAAP/IAS) and transparency in transition economies.

Eastern corporate fraud (e.g., Gazprom) mirrored Enron’s failures.
Western auditors prioritized profits over ethical standards.
Scandals slowed the adoption of international transparency standards.
Important Quote: “A big client is god. You do what they want and tell you to do.”.

IX. The Typology of Financial Scandals

Financial scandals frequently begin with asset bubbles, where prices are inflated far above their intrinsic value. Common types include Ponzi/pyramid schemes that promise unsustainable returns by paying old investors with new money (e.g., Albania 1997). Destructive bubbles are also fostered by corrupt banks lending heavily to politically connected cronies.

Scandals often start as asset bubbles detached from value.
Ponzi schemes rely on new capital to pay existing investors.
Crony lending by banks creates pernicious, destructive asset bubbles.
Important Quote: “To promise unearthly yields on one’s savings is to artificially inflate the ‘price’, or the ‘value’ of one’s savings account.”.

X. The Shadowy World of International Finance

This realm consists of various actors: marginal brokers (Shoppers), sophisticated fraudsters (Con-Men), illicit conduits (Launderers), and market arbitragers (Investors). Launderers transfer undeclared cash to offshore havens and stealthily reinvest it, demonstrating a “pronounced lack of selectivity” because legitimacy is prioritized over yield. Investors exploit immature transition markets for exceptional yields, often using financial instruments as collateral for fresh loans.

Actors include Shoppers, Con-Men, Launderers, and Investors.
Launderers prioritize legitimizing cash over profit yield.
Investors arbitrage discounted bonds and bank guarantees in unstable markets.
Important Quote: “The emphasis is on the word: ‘legitimate’. The money surges in through mysterious and anonymous foreign corporations, via off-shore banking centres…”.

XI. Treasure Island Revisited On Maritime Piracy

Maritime piracy has experienced a resurgence globally, concentrated in areas like Indonesia and the Malacca Straits. Modern piracy is a sophisticated activity of organized crime, requiring extensive planning, weapons, and false documents. Hijacked vessels and cargo are illegally “recycled” multiple times using forged papers. Combating piracy requires international cooperation and addressing the complicity of corrupt local officials.

Piracy is a sophisticated form of organized crime.
The crime involves “recycling” ships and cargo using forged documentation.
Incidents fluctuate with the host economies’ business cycles.
Important Quote: “Piracy has matured into a branch of organized crime.”.

XII. Legalizing Crime

The state maintains a monopoly on behaviors deemed criminal, such as violence and detention. Criminal laws have become so complex and numerous that ordinary citizens often inadvertently become delinquents. Since crime definitions are cultural and subjective, the author suggests decriminalization of soft drugs like cannabis to dismantle crime empires and reduce the staggering financial and social costs of incarceration.

Criminal laws have malignantly proliferated, confusing citizens.
Crime definitions are subjective, based on cultural and political context.
Decriminalization of soft drugs is proposed to dismantle criminal networks.
Important Quote: “The typical American can’t hope to get acquainted with even a negligible fraction of his country’s fiendishly complex and hopelessly brobdignagian criminal code.”.

XIII. Begging Your Trust in Africa

This chapter focuses on the widespread Advance Fee Fraud (AFF/419 scam), often originating from Africa. Victims are lured by the promise of enormous wealth if they help transfer illicit funds, but they are repeatedly charged high upfront “fees” that the fraudsters pocket. The scam is successful because it preys on the victims’ avarice and their willingness to knowingly collude in what they believe is a criminal enterprise.

Advance Fee Fraud (419 scam) targets victims with promises of shared illegal wealth.
Scammers profit by extracting multiple, high “fees” for bribes or taxes.
The crime succeeds because victims agree to collude in the alleged fraud.
Important Quote: “This is one of the rare crimes where prey and perpetrator may well deserve each other.”.

XIV. Organ Trafficking in Eastern Europe

Organ trafficking is a brutal international crime driven by the lucrative market for organs, with a kidney fetching up to $150,000 for wealthy recipients. Organs are harvested from impoverished donors, primarily in Eastern Europe (Moldova, Turkey, Czech Republic). Wealthy clients engage in “transplant tourism”. The flow of organs is typically “from South to North, from poor to rich”.

Driven by high demand and massive profit margins ($150k per kidney).
Donors are mainly impoverished individuals from Eastern Europe.
The traffic flows from poor regions to wealthy, industrialized locales.
Important Quote: “In general, the movement and flow of living donor organs – mostly kidneys – is from South to North, from poor to rich, from black and brown to white, and from female to male bodies.”.

XV. Selling Arms to Rogue States

The illicit arms trade is concentrated in the Balkans and former Soviet republics, where corruption involving state officials and arms dealers is rampant. Renegade officials and organized crime sell advanced weaponry, sometimes including radar systems, to rogue states and terrorist organizations. The environment of instability and warfare is often leveraged to increase the flow of military aid and contracts.

Balkans and former Soviet states are centers of illicit arms trade.
Renegade officials and spies sell advanced weapons to rogue states.
Warfare is leveraged to increase aid and defense contracts.
Important Quote: “The most serious breach of the united international front against Iraq may be the sale of the $100 million anti-stealth Ukrainian Kolchuga radar to the pariah state two years ago.”.

XVI. The Industrious Spies

Industrial espionage involves the illicit theft of proprietary information using advanced technology like laser microphones and computer taps. Perpetrators include competing firms, insiders, and foreign governments seeking to boost their national industrial champions. Most incidents go unreported because companies fear damaging shareholder confidence or revealing vulnerabilities to competitors.

Involves theft of proprietary data using sophisticated technology.
Perpetrators include insiders and foreign governments.
Incidents are widely under-reported due to fear of bad publicity.
Important Quote: “The perpetrators keep quiet for obvious reasons. The victims do so out of fear. It may jeopardize shareholder and consumer confidence.”.

XVII. Russia’s Idled Spies

Following the reduction of Russia’s global geopolitical presence, former military and KGB intelligence operatives (idled spies) have shifted their focus to economic espionage. They are either employed privately or redeployed by the state to steal industrial and corporate secrets to benefit burgeoning Russian multinationals. They often collaborate with computer hackers to infiltrate foreign corporate networks.

Former Russian agents shifted focus to economic espionage.
Spies are either private consultants or state-redeployed assets.
They often collaborate with computer hackers to infiltrate networks.
Important Quote: “Russian secret service personnel, idled by the withering of Russia’s global presence, resort to private business or are re- deployed by the state to spy on industrial and economic secrets in order to aid budding Russian multinationals.”.

XVIII. The Business of Torture

The human rights sector has evolved into a large, profitable business involving lawyers, academics, and NGOs. Concurrently, the global trade in torture implements (stun guns, restraints) flourishes, often manufactured and sold by Western firms via offshore supply networks to bypass domestic bans. Some legal scholars have provocatively suggested legalizing and supervising this dual-use trade.

Human rights advocacy has become a profitable business.
Torture implements are manufactured globally by Western firms.
Offshore networks are used to circumvent export bans on these tools.
Important Quote: “It has become a business in its own right: lawyers, consultants, psychologists, therapists, law enforcement agencies, scholars and pundits tirelessly peddle books, seminars, conferences, therapy sessions for victims, court appearances and other services.”.

XIX. The Criminality of Transition

In post-communist and developing economies, crime became the third biggest global industry, often controlling up to half of the local economy. Criminals succeeded because they were market-savvy entrepreneurs with capital and international connections, filling the void left by dysfunctional centralized systems. They served as an embryonic private sector, even replicating state services like court systems.

Crime is a massive global industry dominating transition economies.
Criminals were the primary entrepreneurs due to liquidity and market knowledge.
They established functioning private sector institutions where the state failed.
Important Quote: “To a large extent the criminals, single handedly, created a private sector in these derelict economies.”.

XX. The Economics of Conspiracy Theories

Conspiracy theories constitute a massive, profitable industry (publishing, film, internet) that offers meaning and empowerment in an ambiguous and chaotic world. The Internet significantly boosts paranoia by blurring the lines between fact and fiction. Financial profits are leveraged through fraudulent charities (“telefunding”) and commercial smear campaigns against targeted products.

The industry provides meaning and empowerment to believers.
The Internet exacerbates paranoia by mixing fact and fiction.
Profits are derived through publishing, film, and fraudulent charities.
Important Quote: “Conspiracies and urban legends offer meaning and purposefulness in a capricious, kaleidoscopic, maddeningly ambiguous, and cruel world.”.

XXI. The Demise of the Work Ethic

The work ethic is collapsing due to the loss of job security, which breeds apathy, and outsourcing, which damages service quality. Depersonalization severs the bond between worker, product, and customer, fostering indifference. The rise of “malignant individualism” means professional standards are often sacrificed for personal emotional needs, summed up as “It’s my way or the highway”.

Job insecurity and outsourcing diminish worker quality and pride.
Depersonalization leads to indifference and feeling immune to negligence.
Malignant individualism prioritizes personal whim over professional standards.
Important Quote: “The depersonalization of manufacturing… contributed a lot to the indifference and alienation of the common industrial worker, the veritable ‘anonymous cog in the machine’.”.

XXII. The Morality of Child Labor

Western condemnation of child labor is often seen by developing nations as a form of trade protectionism designed to penalize cheap imports. For many impoverished families, child labor is critical for survival, and bans often force children into more dangerous occupations. Solutions must focus on providing education and access to credit for families, rather than sudden prohibitions that cause destitution.

Western anti-labor activism is often perceived as trade protectionism.
Child labor is crucial for family survival in many destitute areas.
Solutions require alternative income sources and education access.
Important Quote: “Western anti-child labor activism is often perceived by developing nations as a form of trade protectionism…”.

XXIII. The Myth of the Earnings Yield

Traditional stock valuation models rely on dividends, which are now rarely paid. Analysts substitute net earnings for “expected dividends,” creating the concept of “earnings yield” to justify non-zero valuations. This detachment means the market is driven primarily by anticipated capital gains (the hope of selling higher) and functions as a closed pyramid scheme, susceptible to collapse.

Stock valuation models are obsolete as few firms pay dividends.
“Earnings yield” is a cognitive dissonance used to maintain valuations.
A market driven by capital gains resembles a closed pyramid scheme.
Important Quote: “In the absence of dividends – shares are worthless.”.

XXIV. The Future of the Securities and Exchange Commission (SEC)

The SEC suffers from outdated rules, staff inertia, and a tendency to prefer precedent over aggressively pursuing novel scams. It typically seeks civil remedies (injunctions) for deterrence, often allowing fraudsters to waive disgorgement of ill-gotten gains based on unverified affidavits of poverty. The Sarbanes-Oxley Act introduced stricter corporate accountability and banned audit firms from providing specific non-audit services to their clients.

SEC staff inertia favors precedent over aggressive enforcement.
Fraudsters often waive disgorgement using unverified claims of being broke.
Sarbanes-Oxley mandates stricter accounting oversight (e.g., audit partner rotation).
Important Quote: “At the SEC, the best argument in support of a proposed course of action is ‘that’s what we did last time’.”.

XXV. Trading from a Suitcase. The Case of Shuttle Trade

Shuttle traders are grassroots entrepreneurs who smuggle consumer goods across borders in suitcases, bypassing taxes and safety regulations. This trade provides essential consumer goods and employment in transition economies. However, it often involves corruption rings (customs, police). Official curbs on shuttle trade, often demanded by international bodies, lead to higher regional unemployment.

Grassroots entrepreneurs smuggle goods across borders.
Provides employment and consumer goods in transition countries.
Trade often involves organized corruption rings (customs/police).
Important Quote: “They are the life-blood and the only manifestation of true entrepreneurship in swathes of economic wastelands.”.

XXVI. The Blessings of the Black Economy

The black economy includes legal activities concealed from tax authorities and illegal activities. It is vital in transition countries because it injects foreign exchange, provides liquidity, and operates more efficiently than state bureaucracies. It serves as a crucial safety net and survives precisely because it is beyond the reach of imposing institutions like the IMF.

Comprised of untaxed legal activities and illegal activities.
Provides essential liquidity and efficiency in crisis-stricken economies.
Acts as a safety net against economic hardship and foreign mandates.
Important Quote: “The less tax dollars a government has – the less damage it does.”.

XXVII. Public Procurement and Very Private Benefits

Public procurement (government purchasing) is often riddled with cronyism, nepotism, and bribery. The primary economic problem is the misallocation of scarce resources, as purchases are swayed by political muscle and lobbying rather than rational priorities. Paradoxically, excessive scrutiny, such as that imposed by Japan’s Ministry of Finance clerks, can encourage, rather than discourage, corruption.

Public purchasing suffers from cronyism, nepotism, and bribes.
Decisions misallocate resources due to lobbying and political influence.
Excessive regulatory scrutiny can inadvertently encourage corruption.
Important Quote: “Cronyism and nepotism – haunt public procurement.”.

XXVIII. Crisis of the Bookkeepers

Accounting scandals often stem from the complex intellectual effort required to classify transactions as either expenses (reducing profit) or assets (inflating profit), as demonstrated in the WorldCom debacle. Municipal accounting, using cash-based formats, easily hides deficits by delaying bill payments, preventing meaningful assessment of financial performance. Accounting standards like GAAP and IAS are constantly influenced by political and business lobbying.

Scandals result from misallocating expenses as assets (e.g., WorldCom).
Cash-based municipal accounting hides deficits via delayed payments.
Accounting standards are heavily influenced by business lobbying.
Important Quote: “A fundamental problem with the financial reporting of WorldCom, for example, was that huge quantities of expenses were misallocated in the accounts as assets.”.

XXIX. Competition Laws

Competition laws exist to optimize resource allocation, resulting in the lowest prices and highest quality goods for consumers. Competition weeds out inefficient businesses, benefiting the entire economy. Laws aim to prohibit anti-competitive practices such as predatory pricing (dumping), market allocation, and collective refusals to deal.

Aims to optimize resource allocation and ensure low prices.
Weeds out inefficient businesses through natural economic selection.
Prohibits anti-competitive acts like predatory pricing and market division.
Important Quote: “Competition not only reduces particular prices of specific goods and services – it also tends to have a deflationary effect by reducing the general price level.”.

XXX. The Benefits of Oligopolies

While commonly criticized, oligopolies (markets dominated by a few large firms) can be beneficial. In theory, oligopolists may restrain prices to deter new market entrants. Competition among them often focuses on product differentiation and heavy R&D investment, leading to innovation and higher living standards. Studies suggest cartels are less likely to form in highly concentrated industries.

Dominant firms may restrain prices to deter new market entry.
Oligopolistic competition drives innovation and R&D investment.
Their existence prevents “ossification” and ensures long-term efficiency.
Important Quote: “Oligopolistic competition proved to be beneficial… because it prevented ossification, ensuring that managements would keep their organizations innovative and efficient over the long run.”.

XXXI. Anarchy as an Organizing Principle

The doctrine of “laissez faire,” which views chaos as an efficient organizing principle, fueled fads like deregulation and self-regulation. However, self-regulation in finance (banking, accounting) failed due to avarice and the rational inability of agents to defer gratification. The failures of privatization and deregulation often resulted in increased state interference, reversing the initial goal.

Laissez-faire ideology asserts order emerges efficiently from market chaos.
Self-regulation in finance failed due to human avarice and narcissism.
Deregulation failures led to more intrusive government control.
Important Quote: “Self-regulation failed so spectacularly to conquer human nature that its demise gave rise to the most intrusive statal stratagems ever devised.”.

XXXII. Narcissism in the Boardroom

Financial fraud is frequently driven by “malignant, pathological narcissists” who seek constant narcissistic supply (attention) to sustain their grandiose “false self”. Lacking empathy, they view stakeholders and laws as mere instruments. They operate under a delusion of narcissistic immunity, believing they are exempt from moral constraints and consequences, enabling simple yet audacious frauds.

Fraud is often driven by malignant narcissism seeking attention.
Narcissists lack empathy and view people as instruments for gratification.
A belief in “narcissistic immunity” allows them to commit audacious fraud.
Important Quote: “To be a narcissist is to be convinced of a great, inevitable personal destiny.”.

XXXIII. The Revolt of the Poor

Intellectual property (IP) rights primarily serve to secure monopolies for “Big Money” interests. Piracy flourishes in poor markets because corporate pricing is prohibitively high relative to local purchasing power (e.g., software costing six weeks’ average wage). The Internet facilitates disintermediation and the shift toward free, advertising-subsidized content, threatening traditional IP models.

IP rights are primarily used to secure monopolies for major corporations.
Piracy is driven by prohibitively high pricing in poor markets.
Internet models threaten traditional IP reliance on royalties.
Important Quote: “Intellectual property rights – despite their noble title – are less about the intellect and more about property.”.

XXXIV. The Kidnapping of Content

Plagiarism is the malicious act of misattributing stolen content to oneself (“to kidnap”), making it more pernicious than piracy. It is rampant in academia (high rates of student cheating) and in media, exacerbated by the availability of online content. Detection systems like Turnit.com create “digital fingerprints” to trace stolen work, combating the perpetrators who seek to erase the original author’s identity.

Plagiarism is malicious theft and misattribution of content.
Rampant in academia and media, utilizing online resources.
Detection systems use digital fingerprinting to identify sources.
Important Quote: “Plagiarism is, therefore, more pernicious than piracy.”.

XXXV. The Economics of Spam

Spam (Unsolicited Commercial Email) is a multi-billion dollar industry that generates billions of messages daily, often promoting fraud, scams, and malicious software (malware). Spammers use malware to turn consumer PCs into “zombies” for criminal networks. Spam is categorized as a classic “free rider” problem, requiring global legislation and government intervention to combat its immense social and productivity costs.

Multi-billion dollar industry relying on scams and fraud.
Malware turns consumer PCs into “zombies” for spam networks.
It is a “free rider” market failure requiring government legislation.
Important Quote: “Spam is a classic ‘free rider’ problem.”.

XXXVII. The Fabric of Economic Trust

The market economy functions entirely dependent upon four categories of trust: trust in the economic playing field (rules), trust in other players (rationality), trust in market liquidity, and trust in others’ knowledge/ability. When trust breaks down, catalyzed by systemic shocks, economic activity halts, corruption increases, and destructive psychological coping mechanisms emerge.

Market activity relies fundamentally on systemic trust.
Trust is categorized (playing field, players, liquidity, ability).
Loss of trust leads to corruption and economic collapse.
Important Quote: “If people do not trust each other, or the economic ‘envelope’ within which they interact – economic activity gradually grinds to a halt.”.

XXXVIII. The Distributive Justice of the Market

Market inequality, such as executive salaries exceeding those of scholars, often drives productive jealousy (leading to emulation and innovation). Exclusive ownership (e.g., patents) is argued to compensate entrepreneurs for assuming investment risk and adding value. Libertarian entitlement theories maintain that justice depends solely on ensuring fair processes, irrespective of the resultant wealth distribution.

Inequality drives constructive jealousy and innovation.
Exclusive ownership rewards entrepreneurs for bearing risk.
Justice is achieved through fair initial conditions and processes.
Important Quote: “Conflict and inequality are the engines of growth and innovation – which mostly benefit the least advantaged in the long run.”.

XXXIX. The Agent-Principal Conundrum

The traditional economic model fails to solve the Principal-Agent Problem (motivating management to act for shareholders) because managers rationally pursue their own immense self-interest (looting the firm). The actual alignment is that shareholders and managers are allied against the firm, focusing intensely on manipulating stock prices to maximize capital gains rather than intrinsic company value.

The problem focuses on motivating agents (managers) against self-interest.
Managers rationally loot the company, as costs to individual shareholders are negligible.
Shareholders and managers prioritize boosting stock price over firm value.
Important Quote: “Shareholders and managers are allied against the firm – not pitted against each other.”.

XL. The Green-Eyed Capitalist

This chapter distinguishes between destructive envy (pathological resentment that seeks to destroy the object of success or engages in scams) and constructive jealousy (premised on equality, driving emulation and consumption). Intellectuals often display “bourgeoisophobia,” resenting businessmen they perceive as vulgar yet successful.

Distinguishes destructive envy from constructive jealousy.
Envy leads to destructive coping mechanisms, including social attack and crime.
Jealousy, premised on fairness, drives emulation and competition.
Important Quote: “Envy – a pathological manifestation of destructive aggressiveness – is distinct from jealousy.”.

XLII. Market Impeders and Market Inefficiencies

Market inefficiencies are amplified by “non bona fide” participants, including outright illegal Crooks and semi-legal Illegitimate operators. Psychologically disordered individuals sacrifice economic advantage to maintain emotional balance. Middlemen exploit information failures and sometimes actively create problems to profit from solving them.

Inefficiencies caused by illegal operators and irrational actors.
Psychologically disordered people prioritize emotional balance over profit.
Middlemen profit by creating or exploiting information failures.
Important Quote: “Middlemen are a different story because most of them belong to the active subcategory. This means that they, on purpose, generate market inconsistencies, inefficiencies and problems – only to solve them later…”.

XLIII. The Pettifogger Procurators

Western diplomats in post-communist countries are described as often aging and inept figures who adopt an imperial demeanor. They function as lobbyists promoting specific Western corporate interests using threats, bribes, and collusion with local venal elites. Their actions and evident corruption often lead to popular resentment and the wholesale rejection of Western values by the local populace.

Diplomats act as corporate lobbyists for specific Western interests.
They adopt an imperial demeanor and collude with venal local elites.
Their corruption provokes local rejection of Western values and culture.
Important Quote: “More often than not, they cross the limpid lines between promotion and extortion, lagniappe and pelf, friendship and collusion, diplomacy and protectorate, the kosher and the criminal.”.

XLIV. Microsoft’s Third Front

Microsoft faces a massive challenge from software piracy in regions like Central/Eastern Europe and Asia. Piracy is primarily fueled by Microsoft’s refusal to adopt differential pricing, making software prohibitively expensive relative to local wages (e.g., Office costing six weeks’ average wage in Macedonia). This high pricing sustains illegal markets despite government efforts to mandate legalization.

Piracy is rampant in CEE and Asia (“the third front”).
Fueled by Microsoft’s refusal to use differential pricing in poor markets.
Extortionate pricing generates resentment and sustains illegal markets.
Important Quote: “Microsoft obstinately refused to price its products differentially – to charge less in poorer markets.”.

XLV. NGOs – The Self-Appointed Altruists

NGOs are powerful, self-appointed organizations, often exhibiting top-heavy bureaucracies, lavish expatriate lifestyles, and opaque financing derived largely from foreign governments. Their activism (e.g., against child labor) is sometimes criticized as economically harmful or serving trade protectionist agendas. In crisis zones, NGOs become alternative, sometimes venal, governments due to their control over massive aid funds.

Self-appointed organizations with opaque financing and lavish staff lifestyles.
NGO campaigns are sometimes accused of trade protectionism.
In crisis zones, NGOs can become alternative, powerful (and sometimes corrupt) governments.
Important Quote: “The voluntary sector is now a cancerous phenomenon.”.

XLVII. Quis Custodiet Ipsos Custodes?

(Who is Guarding the Guards?) Corruption in transition countries led to the theft of up to 40% of civilian aid in places like Bosnia. Western institutions (IMF, World Bank) implicitly or explicitly colluded by ignoring the looting, prioritizing regional stability over accountability. This institutional acquiescence transformed corruption into a “pecuniary fertilizer” for violence and crime, infecting the aid workers themselves.

Up to 40% of civilian aid in Bosnia was allegedly stolen.
Western institutions colluded, prioritizing stability over accountability.
Corruption enabled by aid fueled regional violence and crime.
Important Quote: “The world looked away as both – international financial institutions and corrupt regimes – robbed their constituencies blind.”.

XLVII. The Honorary Academic Higher Education for Sale

(Higher Education for Sale) Higher education in post-Communist states is stagnant, irrelevant, and corrupt (e.g., academics selling exams and taking bribes). This dysfunction, rooted in an oligarchy that uses “transcendent parameters” (connections) rather than merit, causes a massive Brain Drain. The best and brightest emigrate to meritocracies, effectively subsidizing richer countries with their human capital.

Academia suffers from corruption, stagnation, and irrelevance.
Oligarchies use connections, not merit, for career advancement.
Failure of meritocracy causes severe Brain Drain to the West.
Important Quote: “The reason is that the best and the brightest – when shut out by the members of the ruling elites – emigrate.”.

XLVIX. The Eureka Connection

Post-communist elites defrauded Western donors by mastering the art of extortion through bureaucracy. These elites deliberately stalled critical reforms, turning processes into agonizing affairs that required Western “bribes” (aid and credits) to advance. Western institutions were complicit, ignoring the diversion of billions into private accounts for political expediency.

Elites learned to “corrupt the donors” via extortion.
Reforms were deliberately stalled to force Western bribes and aid.
Western institutions ignored massive fund diversion for political stability.
Important Quote: “The very processes of transformation and transition… acquired an aura of somnolent lassitude and the nightmarish quality of ensnarement.”.

L. The Treasure Trove of Kosovo

The conflict in Kosovo created opportunities for massive profiteering through the use of shortages, privileged import licenses, and the large-scale diversion of humanitarian aid. The impending post-war reconstruction promised a financial bounty of tens of billions. The conflict itself was largely viewed as a turf war between criminal organizations and their political proxies fighting for lucrative smuggling routes.

Conflict led to profiteering via aid diversion and privileged licenses.
Post-war reconstruction promised tens of billions in contested funds.
The warfare was essentially a struggle over control of criminal smuggling routes.
Important Quote: “The Balkan is composed of states run by crime organizations and crime organizations run by states.”.

LI. Milosevic’s Treasure Island

Milosevic’s financial strategy involved three distinct actions: legitimate state capital flight (to cushion the population against sanctions); personal enrichment by cronies masked as sanctions-busting; and using state banks to finance cronies’ black market schemes with cheap credit. Offshore bank accounts and holding companies (like Beogradska Banka subsidiaries) were used to hide assets, though most diverted funds were spent on countering the embargo.

Engaged in state capital flight to counter international sanctions.
Crony enrichment was masked as sanctions-busting operations.
Most funds were expended on essential goods during the embargo.
Important Quote: “Most of the money was used legitimately, to finance the purchase of food, medicines, and energy products.”.

LII. Macedonia’s Augean Stables,

Macedonia is characterized by extreme political instability and endemic corruption, reflected in massive unemployment (31–35%) and a huge trade deficit (17% of GDP). The black market, including intellectual property piracy (c. 1% of GDP), is highly active. Foreign investors are deterred primarily by institutional dysfunction (courts, banking), rather than by tax rates.

Plagued by corruption, high unemployment (31-35%), and huge deficits.
Institutional dysfunction is the main barrier to foreign investment.
Crime offers lucrative social mobility and employment opportunities.
Important Quote: “Studies clearly evince that multinationals worry less about taxation and more about functioning institutions, a commodity that Macedonia is irreparably short of.”.

LIII. The Macedonian Lottery

The 2001 Macedonian conflict was fundamentally a turf war between Macedonian and Albanian crime gangs and their political proxies, fighting for control over lucrative international smuggling routes (drugs, weapons). Crime and war are the most alluring sources of employment and social mobility in the impoverished and rigid society. Insurrection funds were derived from illicit activities, including drug dealing and white slavery.

Conflict was a turf war over control of smuggling routes.
Crime provides the most lucrative employment in the poor region.
Insurrection was financed by illicit activities like drug trafficking and white slavery.
Important Quote: “The NLA itself was not directly involved in criminal activities, though a few of its members are.”.

LIV. Crime Fighting Computer Systems and Databases

As crime globalizes, law enforcement must also centralize information using advanced computer systems. Agencies maintain global databases to track and analyze violent crimes, homicides, and serial criminals, such as the FBI’s VICAP and the RCMP’s ViCLAS. International bodies like Interpol and Europol utilize secure global communication networks (e.g., I-24/7) to share critical intelligence, including DNA profiles, fingerprints, and watch lists.

Crime fighting utilizes centralized, global databases and networks.
Systems track violent crime, homicides, and serial criminals (VICAP, ViCLAS).
Interpol uses I-24/7 to share DNA, fingerprints, and watch lists internationally.
Important Quote: “As crime globalizes, so does crime fighting.”.

10 Notable Quotes from the Book (Not used in the chapters above)

“Every corrupt transaction is between a venal politician and an avaricious businessman.”.
“The moral authority of those who preach against corruption in poor countries… is strained by their ostentatious lifestyle, conspicuous consumption, and ‘pragmatic’ morality.”.
“The two countries with the highest incidence of AIDS are Africa’s only two true democracies – Botswana and South Africa.”.
“Narcissistic immunity is the (erroneous) feeling, harboured by the narcissist, that he is impervious to the consequences of his actions…”.
“A punishment to the narcissist is a major surprise and a nuisance but it also validates his suspicion that he is being persecuted.”.
“The narcissist is utility- driven, obsessed with his overwhelming need to reduce his anxiety and regulate his labile sense of self- worth by securing a constant supply of his drug – attention.”.
“Intellectual property rights – despite their noble title – are less about the intellect and more about property.”.
“The decline in personal thrift, the skyrocketing number of personal bankruptcies, and the ubiquity of venality and corruption both corporate and political are examples of such dissipation.”.
“A market driven by streams of income from holding securities is ‘open’. It reacts efficiently to new information. But it is also ‘closed’ because it is a zero sum game.”.
“This blatantly discernible ineptitude (of diplomats) provokes the ‘natives’ into a wholesale rejection of the West, its values and its culture.”.

About the Author

Samuel Vaknin, Ph.D., is the author of Financial Crime and Corruption and is noted for his wide-ranging career spanning academia, international finance, and government consultation. He holds a Ph.D. in Philosophy (Philosophy of Physics). Dr. Vaknin served in senior positions with the Nessim D. Gaon Group of Companies (NOGA and APROFIM SA) in Geneva, Paris, and New York, where his roles included Chief Analyst of Edible Commodities and Vice President in charge of Sovereign Debt Financing.

From 1999 to 2002, he was the Economic Advisor to the Government of the Republic of Macedonia and the Ministry of Finance. He also served as a Senior Business Correspondent for United Press International (UPI) from 2001 to 2003. His publications include Malignant Self Love – Narcissism Revisited (1999–2007) and After the Rain – How the West Lost the East (2000). Among his achievements is the Israel’s Council of Culture and Art Prize for Maiden Prose (1997). He has written hundreds of professional articles and is a recognized commentator on economic and geopolitical issues.

How to Get the Most from the Books

To maximize understanding of Financial Crime and Corruption, readers should integrate its diverse analyses using a critical, multi-disciplinary approach:

Contextualize Corruption: Do not view corruption as isolated acts, but as symptoms of systemic political and institutional dysfunction, especially where the state is “legalistic” but not “lawful”. Consider how corruption types (e.g., acceleration vs. decision-altering fees) affect economic efficiency differently.
Apply Psychological Models: Utilize the concepts of malignant narcissism and narcissistic immunity to understand the motivation behind massive, audacious corporate fraud. Recognize that punishment may fail if it inadvertently grants the narcissist desirable attention.
Focus on Structural Reform: Recognize that simply banning activities (like child labor or crime) can be counterproductive, pushing them into more dangerous realms. Instead, prioritize radical policy changes like deregulation, reduction of red tape, and the strengthening of weak institutions (courts, customs).
Critique International Intervention: Analyze international actors (IMF, NGOs, diplomats) with skepticism, understanding how their self-interest, conspicuous consumption, and institutional inertia have sometimes enabled or exacerbated local corruption and kleptocracy.
Understand Criminal Entrepreneurship: Acknowledge that in shattered economies, criminals often act as sophisticated, liquid, and market-aware entrepreneurs, filling essential economic functions where the state has failed.

Conclusion

Financial Crime and Corruption offers a provocative, meticulously detailed map of global financial villainy, arguing that misconduct is an integrated function of political systems, corporate pathology, and economic desperation. The book is a crucial resource for understanding why transitions fail and how the crisis of trust in institutions permits criminality to become a dominant economic engine. By forcing readers to confront the moral ambiguity of corruption and the complicity of international institutions, the work insists that true accountability requires not just punishing the criminal, but radically transforming the flawed systems—political, psychological, and economic—that guarantee crime will flourish.